The Business of Austerity

Debt-ceiling and Republicans

When Congress finally reached an agreement to lift the debt ceiling, a week ago, many predicted that investors would react with a sigh of relief. After all, on the surface the deal looked good for business, allowing the U.S. to avoid defaulting on its debt while preserving corporate tax loopholes and avoiding a tax hike for the wealthy. And it was a clear victory for congressional Republicans, traditionally corporate America’s best friends in Washington. (The Chamber of Commerce spent more than thirty-four million dollars in the 2010 election, almost entirely on Republican candidates.) Yet the prophesied relief rally never materialized. Instead, investors spent the week dumping stocks as fast as they could.

The debt deal alone didn’t send stocks spiralling downward, obviously. But the market’s plunge was largely the product of fears about the prospects for corporate profit in an increasingly weak economy, and the debt agreement amplified those fears. Markets, for one thing, tend to be spooked by uncertainty, and the debt-ceiling agreement has increased uncertainty by making it more likely that we’ll see down-to-the-wire, default-risking negotiations in the future. Senate Minority Leader Mitch McConnell was explicit about this last week, saying that there would be no more “clean” debt-ceiling increases in the future—in other words, Republicans will keep using the threat of default as a political weapon. This approach may well be extended to bargaining over budget resolutions as well, with Republicans threatening a government shutdown unless they get what they want. If that sounds improbably reckless, consider that every Republican Presidential candidate except Jon Huntsman came out against the final debt-ceiling deal. Even if you explain this as pandering to Tea Party voters, there’s no ignoring the fact that these candidates were advising congressional Republicans to let the United States default. Once games of chicken become the accepted way to resolve budget issues, the U.S. economy will become a much riskier place.

The deal also hurts business in more concrete ways. Even though the spending cuts are backloaded, so that the major ones are still more than a year away, they will likely hit precisely the kind of public spending—on infrastructure, basic research, and defense—from which corporate America reaps great, if often unacknowledged, benefits. More important, the debt-ceiling fight made clear that, even as the economy struggles to avoid recession, no help can be expected from Washington. President Obama may be talking about the need to create jobs, but, with the advocates of austerity in charge, it’s hard to see where support for any new government initiatives is going to come from. Indeed, it’s possible that Republicans will block the extension of unemployment-insurance benefits and of the current payroll-tax cut. That would deliver a significant hit to the economy next year. And the austerity advocates will also be emboldened in their attacks on the Federal Reserve, which they argue has been overly loose in its monetary policy (when in fact it’s been too tight). The economy needs strong doses of both fiscal and monetary policy. The debt deal makes it more likely that we’ll get neither.

There are those, on both the left and the right, who would argue that Republicans are pushing for austerity because, whatever its consequences for workers and borrowers, it serves the interests of business and the wealthy. But it doesn’t serve those interests at all. Decades ago, America’s rich were a true rentier class. They got most of their income from bonds and lived off their investments, and their main priority was keeping inflation low, regardless of anything else that happened. So austerity suited them nicely. The rich of today, by contrast, get much more of their income from their jobs and from the stock market, which means that they do better when growth is strong. And, while companies have figured out how to make money even during steep downturns—during this very weak recovery, corporate profits have rebounded strongly—over-all corporate profits are below where they were in 2006. That’s been reflected in the stock market, which, even before last week’s precipitous tumble, was nearly twenty-five per cent below its 2007 peak. In fact, the S. & P. 500 hasn’t really budged in a decade. So, while corporate America has been doing well relative to everyone else, it would be doing much better, and investors would be much happier, if growth were stronger and unemployment were lower, even if inflation and government spending were higher. Austerity during an economic slowdown isn’t just bad for the unemployed. It’s also bad for business.

There are, to be sure, all sorts of ways in which House Republicans are still useful allies for corporations. They’re trying to roll back financial regulation and to limit the E.P.A.’s power, and they’ve quashed any attempt to strengthen the power of labor unions. But it’s time for business to realize that, on the question of managing the economy, House Republicans will let ideology trump economic interest. After all, it was proto-Tea Partiers in the House who, in 2008, voted down TARP the first time around, erasing more than a trillion dollars in stock-market value in a single day. Now, once again, House Republicans have pursued a strategy that business doesn’t want and that will damage investors. The grim truth is that, at this point, we’d be better off if the House Republicans really were the handmaidens of corporate America, rather than ideologues who prefer crisis to compromise. As it is, the G.O.P. has put our money where their mouth is. ♦

James Surowiecki is the author of “The Wisdom of Crowds” and writes about economics, business, and finance for the magazine.